To manage through a resource-constrained environment, it is essential to get the most out of procurement planning
The global financial crisis has led many pharmaceutical companies around the world to make strategic changes and, more often than not, reduce costs. Fluctuating prices, aggressive generics entries, and challenging pipelines, are adding increased pressure on the top line, so executives need to have an efficient annual setup in order to free up cash flow for R&D, while also preserving margins and shareholder returns.
Reassessing ways of doing business, then changing your organization's behavior to your advantage is key to finding the sweet spot between managing demand and consumption. (getty images / andy roberts)
While working to manage company growth and operational challenges, one of the key levers in cost strategy is excellence in global procurement and, above all, execution of the broad project portfolio across the organization. These imperatives have elevated the role of the procurement executive from a buyer of goods and services to a true business partner in the pharmaceutical companies' quest to remain profitable and competitive in the turbulent economy.
Making an impact on costs is complex in large multinational, matrixed corporations. To see a true impact on your bottom line, you need to ask the right questions from the start, and tailor your programs to your business's unique circumstances. While there is no one-size-fits-all strategy, I have found through many years of working with pharma companies that there are five key questions every global procurement executive should ask as they enter a constrained fiscal and payment environment in 2011. Addressing these issues will not only put you in a better position to plan for the year, but also help you come closer to meeting your financial goals.
1. Are you aggressive enough in your targets on procurement cost savings?
Many executives limit themselves by comparing their results with other large pharmaceutical companies. Consider looking at more aggressive businesses in generics and other industries, which have taken more of a hard line on their cost reduction strategies and, consequently, have seen bigger payoffs. For example, one professional benchmarked the travel expenses of a pharmaceutical client's executive office to those of other global manufacturing firms with the same geographical footprint. He found a $9,000 to $10,000 difference per person in total annual costs, demonstrating an enormous opportunity to revisit travel cost targets. This strategy can even be more dramatic if you start comparing industries like automotive or high-tech, which are making most of their profits from their ability to source and procure effectively.
2. When you look at procurement costs, are you looking at all the factors affecting them?
Just focusing on driving prices down with suppliers is a good start, but usually this will have its limits, as it affects only your suppliers. The concept of total cost of ownership has gained greater importance in many corporations, but the degree to which it is implemented is a different story. We find that managing demand and consumption remains mostly unexplored. The key is to reassess ways of doing business first, then change behavior within your organization to modify—to your advantage—the current demand and adaptation to new processes.
A leading pharmaceutical company needed to reduce their overall marketing spend. We worked to prioritize their needs, while looking for ways to generate greater compliance and reduce costs. Several new processes were developed, such as requiring that 90 percent of all purchases go through an approval process, scaling back catalogue offerings, and requiring longer lead times for placing orders. As a result, the company experienced 40 percent savings across the key regions with no loss of business.
3. Do you have the right mix of tactical versus strategic productivity initiatives?
While your quarterly or annual targets are usually the most important objectives (and you cannot defer good results), many of the elements you implement this year will also determine what you can achieve next year. While focusing on easy cost reductions and short lead times can be a solution for the current year, this cost-saving strategy will likely create a problem the year after. Savings which require more strategic cost initiatives and longer lead times need to be started earlier rather than later, and you should aim for a healthy blend of initiatives that will allow for short-term success but also ensure that you are set up for the long-term. Peppering in a few strategic initiatives will help you avoid the need for quick fixes over time.
For example, a life sciences supply company wanted to implement simple tactics for reducing inventory by reorganizing its ordering processes and payment terms. At the same time, it aimed to reduce complex overhead by phasing out some of the products in its inventory, improving its supply chain footprint, and managing how it deals with its supply chain sourcing throughout the network. This initiative yielded limited savings in year one, but more importantly, will be key to achieving cost savings targets for next year as it implements a more streamlined inventory and supply chain organization.
4. Are you putting the right amount of resources in implementation and execution, or do your projects get stuck after the initial planning phase?
There is tremendous value in planning a cost reduction and productivity program very carefully; however, there can often be a disconnect between the planning and implementation phase. This problem is often elevated by a lack of transparency around the real total number of projects occurring within the organization, and therefore a gap in knowing where resources can best be allocated. While it can take some time and investment to assess the true value and return on any given project and the real internal resources deployed on it, having an accurate view on which projects people spend their time is often all it takes to make the right resourcing and prioritization decisions. This resource allocation transparency is instrumental to making these decisions.
5. You might pursue all the right procurement activities, but are you sure that you are going at the right speed?
Investing in strategies that help you gain speed is a counterintuitive notion in a climate of reduced spend. Spending money, even if outside the budget, to accelerate capture of the opportunity is worth considering, as it might result in savings. For example, implementing an initiative with a $12 million annual cost savings target beginning in April, rather than July, has an incremental bottom line impact of $3 million. This adds up to a massive amount when you consider the large cost base of leading pharmaceutical companies. Adding more resources or management attention to a project in order to complete it faster is one approach to increasing speed; improving processes and systems is another.
Overall, executives throughout the industry have said that meeting lofty cost reduction goals set for 2011 will require major changes in their company's approach. At the same time, these executives are charged with growing their organizations during a time when resources are being cut back.
Companies are challenged now more than ever to simultaneously reduce costs and to continue to grow and innovate. They will, therefore, need to find the most effective mix of measures to be executed both through the line organization and the launch of new cost reduction products. In a resource-constrained environment, it will be key to get the most out of each initiative and every project they execute to stay competitive. Pharmaceutical companies that execute well and confront these changes will most likely come out on top, emerging stronger and fitter after the storm.
Frédéric Brunner is the CEO of a-connect, a global consultancy and project execution partner. He can be reached at firstname.lastname@example.org